How should pension schemes be invested to improve chances of paying member benefits in full and on time?
This is the perennial question facing DB schemes as they mature and look to move into a position where they can pay benefits to members without being dependent on more contributions from the corporate sponsor.
This report looks at investment strategy choices pension funds have, by directly measuring their effect on the outcome a DB pension fund is aiming for. We do this by measuring the likelihood of meeting the benefits promised to members in full and on time, and then optimising the strategy to improve that outcome.
This paper provides a number of key insights, and two main conclusions.
1. In order to determine how likely it is to meet member promises there is merit in adding a new lens to track the probability of paying pensions due.
2. We then examined the impact of investing in contractual assets and have proven their value in improving the probability of paying pensions.
The position however varies depending on the funding level of your particular fund. We have looked at what funding levels benefit from pulling specific investment and risk management levers.
Continue reading “Meeting Member Promises”
Nothing seems to polarise opinion in investment circles more than the level and future direction of interest rates. This is problematic, as moves in long-dated rates have been the main driver of Defined Benefit pension fund financial health over the last decade.
DB pension schemes that hedged their interest rate risks before the summer of 2016 will have had the pain of recent falls in interest rates partly or fully mitigated. But many schemes have not – with long-dated gilt rates now below 2%p.a. have these schemes now missed the boat? Is it too late to hedge? In this piece we take a balanced look at the arguments for and against interest rate hedging at these levels and provide a framework to help all stakeholders move discussions forward.
Continue reading “Is It Too Late to Hedge?”
Certain investors have a primary focus on ‘hunting alpha’. Their aim is to invest for long term asset growth through a focus on high investment returns (and not on liabilities). This has historically lead to equity-heavy portfolios, often actively managed. Over recent years and decades these portfolios have generally done well. However, generating equivalent levels of return from here may be more challenging. Is it possible to go after these kinds of returns without relying on equities, and the skills of equity managers, alone? In this piece we will show how equities can sit alongside other forms of high-returning investments. In particular, how you can combine illiquid and credit-focused asset classes. These combinations create diversified high-returning portfolios. Portfolios which aren’t solely dependent on equities for their returns.
Continue reading “A Roadmap for Alpha Hunters”
Many defined benefit schemes are in a position where they experience negative cashflows. This happens because each month or year as they pay more in benefits than they receive in contributions. There is nothing wrong with this, of course. In fact, … Continue reading Walking Uphill: How to Manage Negative Cashflows
Derivatives can be powerful risk management tools for pension schemes, but the amount of assets that need to be held as collateral (to provide a buffer against adverse market movements) needs to be set carefully and monitored regularly as part of the scheme’s overall strategic asset allocation. The amount is likely to be between 26% and 40% of assets, depending on which stage the scheme is in.
Continue reading “Collateral – How Much Is the Right Amount?”
Introducing Ampersand: The Latest Thinking, Tailored to Your Needs Hello! & welcome to the first release from Redington Ampersand Institute (R&i). We launched R&i at our Unconference in January 2016. The purpose was to bring a number of content … Continue reading Research This Quarter
Some investment research is good, and a lot of it is not. Some is too complex, and some is so detached and theoretical it is unlikely to ever be useful. How do you deal with that? How do you access consistently innovative and … Continue reading Our Research Promise to You
Redington Ampersand Institute (&i) brings our deep thinking and practical research under one roof. A guarantee of quality and pioneering research that embraces the detail, but always keeps the context in mind. So you can sink your teeth into the finer … Continue reading Welcome to &i
Most pension scheme trustees would agree on one thing. Long-term interest rates are at low levels in the UK today (compared to their history). It’s easy to find explanations for this among economists. It’s just as easy to find predictions … Continue reading Liability Hedging – A Rock and a Hard Place
The landscape for managing pension schemes continues to change.. Now, more than ever, pension trustees and corporate sponsors are facing a number of challenges: lower yields, sponsor balance sheet and new regulations to name a few. However, the fundamental problem … Continue reading How can you adopt a more integrated approach to fund deficits?